Money, Bonds, and Foreign Exchange
Abstract
In the theory of finance, capital markets provide securities which allow the ownership of productive assets to be allocated among investors according to their willingness to bear risk in exchange for return, and independently of their tastes for the productive services provided by the assets. This paper uses the theory of finance to study the role of money as a productive asset and the transformation of money into a portfolio asset. True to its purpose, the capital market provides securities-nominal bonds-that allow an allocation of the current services of the money supply according to its current productivity and without regard for its future purchasing power risk, and an allocation of the future purchasing power risk of the money supply according to the willingness of investors to bear this risk in exchange for return and without regard for investor needs for the future transactions services of money. In open
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